G20 finance ministers and central bankers mull transnational tax reforms

Finance ministers and central bankers from the G20 nations gather in Washington today for two days of discussions expected to focus on global tax coordination.

Talks will focus on a proposal by the Organization for Economic Cooperation and Development about how to tax and regulate profit allocation of multinational companies that operate jurisdictions where they do not have a physical presence.

Traditionally, companies have paid taxes in the countries where their economic activity is generated. But in the digital economy, firms can move the source of their profits—such as patents and other intellectual property—to countries where tax rates are extremely low, allowing them to pay lower rates.

In response, many countries, especially in Europe, have moved to curb that practice through new taxes on large multinational companies that sell to their citizens but pay little or no tax to their countries.

Officials hope the framework will form the basis of an international agreement on digital taxation as early as next year. If negotiators can now reach an agreement on key details, the plan could pave the way for new taxes on tech companies, automakers and any other multinational firms that operate online. The framework would also be a win for large multinationals, even though they pay more in taxes, as the alternative would be a series of country-by-country digital taxes that could be expensive to comply with.

Wake up smarter with an assessment of the stories that will make headlines in the next 24 hours. Download The Daily Brief.